Lesson 7 - How Firms Raise Capital (Reading)

Question 1

bootstrapping

Answer 1

the process by which many entrepreneurs raise seed money and obtain other resources necessary to start their business

Question 2

venture capitalists

Answer 2

individuals or firms that invest by purchasing equity in new businesses and often provide entrepreneurs with business advice

Question 3

angels (angel investors)

Answer 3

wealthy individuals who invest their own money in new ventures

Question 4

Why are venture capitalist investments often provided in the form of preferred stock that’s convertible to common stock?

Answer 4

Preferred stock ensures that the VCs have the claim among stockholders if the firm fails, whereas the conversion feature enables the VCs to share in the gains if the business is successful

Question 5

productive assets

Answer 5

assets that have the ability to generate profits and cash flow

Question 6

What is the difference between a strategic and financial buyer?

Answer 6

A financial buyer does not expect to gain through operational or marketing synergies

Question 7

Bootstrap financing

Answer 7

stage 1 of VCFC: entrepreneur supplies funds, prepares business plan, and searches for initial outside funding

Question 8

Seed-stage financing

Answer 8

stage 2 of VCFC: venture capitalists provide funds to finish development of the concept

Question 9

Early-stage financing

Answer 9

stage 3 of VCFC: VCs provide financing to get the business up and running

Question 10

Latter-stage financing

Answer 10

stage 4 of VCFC: AKA mezzanine financing; typically includes 1-5 additional stages

Question 11

Exit strategy

Answer 11

stage 5+ of VCFC: VCs exit by selling to a strategic buyer, financial buyer, or selling stock to the public (IPO)

Question 12

seasoned public offering

Answer 12

the sale of securities to the public by a firm that already has publicly traded securities outstanding

Question 13

Securities and Exchange Commission (SEC)

Answer 13

securities sold must first be registered here before being publically offered; imposes various filing and requirements after a firm goes public

Question 14

What are the 3 basic services investment bankers provide? Describe them.

Answer 14

(1) origination -> giving financial advice and getting issue ready to sell (2) underwriting -> risk-bearing part of IB (3) distribution -> reselling securities to public

Question 15

preliminary prospectus

Answer 15

the initial registration statement filed w/ the SEC by a company preparing to issue securities in the public market; it contains detailed info about the issuer and the proposed issue ex. financial condition, description of mgmt team, comp analysis of industry, etc.

Question 16

firm-commitment underwriting

Answer 16

underwriting agreement in which the underwriter purchases securities for a specified price and resells them

Question 17

price risk

Answer 17

the risk an underwriter bears when the resale price of a stock might be lower than the price the underwriter originally pays to the issuer

Question 18

underwriter’s spread

Answer 18

the investment banker’s compensation (difference between the investment banker’s purchase for bearing risk, and profit)

Question 19

best-effort underwriting

Answer 19

underwriting agreement in which the underwriter does not agree to purchase the securities at a particular price but promises only to make its “best effort” to sell as much of the issue as possible above a certain price

Question 20

underwriting syndicate

Answer 20

a group of underwriters that join forces to reduce underwriting risk (may enlist help from a selling group to assist w/ sale of securities, this group receives commision and bears no risk of underwriting the issue)

Question 21

underpricing

Answer 21

offering new securities for sale at a price lower than their true value (aka closing value of stock at end of first trading day) - underwriters will want to do this when offering an IPO price to the issuer to protect themselves

Question 22

direct costs to the issuer

Answer 22

underwriting spread plus out-of-pocket expenses

Question 23

general cash offer

Answer 23

AKA registered public offering; a sale of debt or equity, open to all investors, by a company that has previously sold stock to the public

Question 24

shelf registration

Answer 24

a type of SEC registration that allows firms to register to sell securities over a two year period and, during that time, take the securities “off the shelf” and sell them as needed